Topic 6 Industry Environments Rationalizing Diversification and Integration Behavioral...
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Topic 6
Industry Environments
Rationalizing Diversification and Integration
Behavioral Considerations Affecting Strategic Choice
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Different Industry Environments??
• You also may want to evaluate different strategies to build competitive advantages …. given the fact that you may be operating in any one of a number of different industry environments
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“Typical” Industry Settings
Emerging IndustriesIndustries Transitioning to MaturityMature and Declining IndustriesFragmented IndustriesGlobal Industries
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Characteristics of Markets in Emerging Industries
• Proprietary technology and technological uncertainty
• Competitor uncertainty due to inadequate information
• High initial cost structure
• Few entry barriers***
• First-time buyers require initial inducements
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Strategic Options/Opportunities for Emerging Industries
1. shape industry’s structure
2. rapidly improve product quality
3. establish favorable relations with key suppliers**
4. acquire a core group of loyal customers
5. forecast future competitors
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Characteristics of Maturing Industries
Intense competition for market share Increased sales to experienced, repeat buyersNew products and new applications harder to
come by Increase in international competitionDeclining profitability
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Strategic Options for Maturing Industries
• Prune the product line
• Emphasize cost reductions
• Focus on selecting loyal buyers
• Pursue horizontal integration
• Expand internationally
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Characteristics of already Mature/Declining Industries
Demand grows more slowly than economy, or even declines
Slowing growth is caused byTechnological substitutionDemographic shiftsShifts in consumer needs
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Strategic Options for already Mature/Declining Industries
• Focus on key market segments offering growth opportunity
• Emphasize product innovation and quality improvement
• Emphasize production and distribution efficiency
• Gradually harvest the business
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Characteristics of Fragmented Industries
No firm has a significant market shareNo firm can significantly influence industry
outcomesExamples
Professional servicesRetailingWood and metal fabricationAgricultural productsFuneral industry
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Strategic Options for Fragmented Industries
• Tightly managed decentralization
• Standardized, efficient, low-cost facilities at multiple locations
• Specialization (Product type, customer type, type of order, geographic areas)
• Bare bones/no frills
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Strategic Options: Pursuing Global Market Coverage …
• export products
• License foreign firms
• foreign-based plants and distribution
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Questions Related to Diversification and Integration #1
1. Are there opportunities for sharing infrastructure and capabilities?
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Critical Elements for Shared Opportunities to Be Meaningful
• Shared opportunities must be a significant portion of the value chain of businesses involved
• Businesses involved must truly have shared needs or there is no basis for synergy in the first place
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Questions Related to Diversification and Integration #2
2. Are we capitalizing on our core competencies?
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Evaluating the Role of Core Competencies
Is each core competency providing a relevant competitive advantage to
the intended businesses?Are businesses in
the portfolio related in ways that make the
company’s core competence(s)
beneficial?
Are our combination of competencies
unique or difficult to
create?
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Questions Related to Diversification and Integration #3
3. Does the company’s business portfolio balance financial resources?
– A number of portfolio techniques
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The BCG Growth-Share Matrix
Star Problem Child
Cash Cow Dog
Cash Generation (Market Share)
High Low
High
Low
Cas
h U
se (
Gro
wth
Rat
e) Market share: Dividing point is usually … only the two-three largest competitors in any market fall into the high market share region
Growth Rate: Dividing point is usually the GNP’s growth rate
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Behavioral Considerations Affecting Strategic Choice
• Role of current strategy– What is the amount of time and resources invested in previous
strategies?
– How close are new strategies to the old?
– How successful were previous strategies?
• Degree of firm’s external dependence– How powerful are firm’s owners, customers, competitors,
unions, and its government?
– How flexible is firm with its environment?
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Behavioral Considerations Affecting Strategic Choice
• Attitudes toward risk– Risk-oriented managers prefer offensive,
opportunistic strategies– Risk-averse managers prefer defensive, conservative
strategies
• Managerial priorities different from stockholder interests– Agency theory suggests managers frequently place
their own interests above those of their shareholders
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Behavioral Considerations Affecting Strategic Choice
• Internal political considerations– Major sources of company power are CEO, key
subunits, and key departments– Power can affect corporate decisions over analytical
considerations
• Competitive reaction– Probable impact of competitor response must be
considered during strategy design process– Competitor response can alter the success of
strategy